80-cent loonie: Good for shoppers, bad for oil producers

One of the few saving graces of the oil downturn has been that oil is priced in U.S. dollars, meaning that as the loonie dropped over the past three years, it cushioned the blow of the price drop. That's coming to an end.

Another hit to the oilpatch, as the Canadian dollar trades around 80 cents US.

The oilpatch is suffering from lower oil prices and a stronger Canadian dollar. (Todd Korol/Reuters)

One of the few saving graces of the oil downturn has been that oil is priced in U.S. dollars. Energy companies sell their products in U.S. currency, but pay their expenses in Canadian dollars. So as the loonie dropped over the past three years, it tempered the brutal downturn.

Traditionally the value of the Canadian dollar moves with oil; as oil prices move higher, the loonie does as well. When oil was last trading above $100 US, the Canadian dollar was above 90 cents US.

That relationship has broken down recently, following moves by the Bank of Canada to increase interest rates. The key overnight lending rate in Canada moved higher earlier this month and is broadly expected to rise again in October.

As an example, a year ago, when the price of oil was also hovering around $45 US, the Canadian dollar traded at 74 cents US. Today, with interest rates in Canada rising, Canadian oil producers are dealing with $45 oil and a Canadian dollar nearing 80 cents US.  

Higher interest rates hurt the oilpatch

"This is terrible news for Canadian producers," said Martin Pelletier, chief investment officer with Trivest Wealth Counsel.

"As that relationship moved together in the past, with oil and the currency, the drop in the value of the Canadian dollar will soften the blow. And now we're in a situation where oil prices are low, if not falling, and the Canadian dollar rising — it's a double whammy."

Maybe even a triple whammy. Higher interest rates also affect borrowing by oil companies, just as they affect the borrowing of homebuyers

It is already tricky to raise capital in the energy sector, given insecurity about the future of oil prices. Rising interest rates add another level of difficulty to the process.

Traders turn against U.S. greenback

Among currency traders, sentiment around the Canadian dollar has shifted in recent weeks. Over the spring, there was a record short position on the loonie, meaning traders were betting that the currency was going to continue to fall. That sentiment has shifted and more traders are betting on the Canadian dollar moving up. At the same time, sentiment is becoming negative on the U.S. dollar against all currencies.

As with the price of oil, the level of interest rates and the value of the currency are out of the hands of Canadian oil producers, who are left to control expenses as best they can.

"What you can do is ask, 'Is this sustainable long term, and what can we do to offset this?' So you can at least try to be proactive from that standpoint," Pelletier said.

There are some bright spots, as oil prices moved up slightly today. Western Canada Select, an Alberta-specific oil blended in the oilsands, has seen its differential with the U.S. benchmark West Texas Intermediate shrink considerably in the past year, which gives some relief to an oilpatch that is having trouble catching a break.